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Better Markets Calls On The SEC TO Aggressively Police Credit Ratings Agencies

Better Markets called today for the Securities and Exchange Commission to provide more rigorous oversight of the troubled credit-rating industry.

 “The SEC needs to use its new authority under Dodd-Frank to require these firms to impose tough internal controls and rid themselves of conflicts of interest that helped drive the U.S. economy to near collapse,” said Dennis Kelleher, president and CEO.

 Commenting on the recent downgrade of the U.S. credit rating, Mr. Kelleher stated: “Given their egregious role in the financial crisis and the European sovereign debt crisis, the credit rating agencies have been seen as abysmal failures at assessing credit risk. That was supposed to be their expertise. Yet, rather than correct their many deficiencies there, they are now claiming to be experts on assessing political risk and understanding the U.S. political system and how it will perform in the future. They seem intent on proving their incompetence in as many areas as possible.”

 The nonprofit, nonpartisan group also sent a comment letter to the SEC today regarding its proposed rules for rating agencies (called Nationally Recognized Statistical Rating Organizations). Better Markets said that while the proposed rules provided a good framework for monitoring them, they still had significant gaps and weaknesses that could erode market integrity and place investors and the U.S. economy at risk. Comment letters on the proposal were due today.

For example, one of the SEC’s proposed rules would allow the rating agencies to establish and maintain their own internal control and compliance programs. In effect, the SEC is allowing the rating agencies to write their own rules and set their own standards.  “We know from the financial crisis that the rating agencies don’t deserve another opportunity to police themselves. They failed the American people last time and the SEC must make sure they don’t do it again,” Mr. Kelleher said. These firms have amply demonstrated they require more, not less, oversight, after vouching for subprime mortgages that later turned out to be toxic.

 Another example is the proposed rules regarding conflicts of interest, which must be strengthened.  Stephen Hall, securities specialist for Better Markets, noted: “It is unacceptable that the proposed rules are weak on requiring the rating agencies to identify and prohibit conflicts of interest. We have already seen what happens when selling a rating is more important than getting the rating right.  The proposed rules simply give rating agencies too much leeway to police their own conflicts of interest.” The rules must prohibit sales considerations from actually influencing the ratings process, and they must ensure that firms thoroughly review any ratings of a former employee who went to work for an entity that he or she previously rated.

Mr. Kelleher stated, “The credit rating industry needs vigilant oversight and firm guidance, not a hands-off approach. The SEC must use its new regulatory powers to ensure credit ratings are free from conflicts and self-interest.  It must also protect the American people from the extraordinary power that the rating agencies have.”

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